Paul L. Caron
Dean




Tuesday, August 23, 2011

S Corp Shareholder Compensation

Tony Nitti (WithumSmith+Brown, Aspen, CO) has posted S Corporation Shareholder Compensation: How Much Is Enough?, Tax Adviser (Aug. 2011). Here is the Introduction:

S corporation shareholder-employees and their tax advisers often find themselves with differing goals when setting the shareholder-employee’s compensation. Typically, the shareholder-employee prefers to minimize compensation in favor of distributions to reduce payroll taxes. Tax advisers, however, are faced with a body of governing authority providing that the shareholder-employee cannot avoid the imposition of payroll taxes by forgoing reasonable compensation. Unfortunately, until recently this governing authority had offered little in terms of how to actually compute reasonable compensation, leaving tax advisers with sparse guidance upon which to rely when recommending salary amounts to their clients.

In late 2010, an Iowa district court decided Watson, a reasonable compensation case that, together with the North Dakota District Court’s 2006 decision in JD & Associates, provides the direction tax advisers have been seeking. Watson [more here] and JD & Associates shed much-needed light on the methodology the IRS and the courts use to determine reasonable compensation in the S corporation arena, providing an analytical approach tax advisers can follow when guiding their clients.

https://taxprof.typepad.com/taxprof_blog/2011/08/s-corp.html

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